At some point in life, most people will need to get a loan to make a significant purchase, such as a house or car, for example. Personal loans are a flexible option to fund just about anything, and since they have fixed payments and predictable terms, it’s easier to budget too.
When it comes to getting approved for a personal loan, there isn’t a one-size-fits-all formula. Factors such as credit score and income will depend on the lender, and some would also consider additional data like education level and free cash flow. However, loan companies have one thing in common – they want to be paid on time. Naturally, this means that they will only approve borrowers who meet their requirements.
When applying for a loan, the most important thing is to ensure that your credit and finances are in a good position. In this article, we take a quick look at ways to improve your loan approval chances.
Check & Clean Up Your Credit Score
Your credit score is a significant aspect of a personal loan application. To increase your chances of approval, your score needs to be higher. Here are some things to bear in mind:
- Be sure to check your reports for errors. Some common mistakes that can actually hurt your score are closed accounts that are reported as open, including wrong charges and incorrect credit limits.
- Get ahead of your payments, and if you’re not, then pay attention to making monthly payments toward your debts. Pay more than the minimum when possible, as this will benefit your credit utilization ratio (the percentage of your available credit) and your payment history. These two factors make up 65% of a FICO credit score.
- Call the customer service number and request a credit limit increase. You have a better chance if your income has increased since you got the card and provided that no payments have been missed.
Rebalance Your Debt-To-Income Ratio
What is a debt-to-income ratio? It’s pretty simple – it’s the ratio of how much debt you have over your income. A high debt-to-income ratio indicates that you have a tremendous amount of debt relative to your income, which is a key indicator of financial discrepancies and an inability to pay debts.
Therefore, if a good chunk of your income is put into monthly debt repayment, including vehicle loans, mortgages, or revolving credit card debt, you might not be eligible for a loan, irrespective of your credit score. Banks want to ensure you can afford to repay the loan, which is why having a high debt-to-income ratio is a solid red-flag indicator.
Since loan applications ask for your annual income, you can consider starting a side hustle or part-time work and include the money earned.
Don’t Request Too Much Cash
Here’s the thing: lenders want to ensure borrowers can repay their loans. Asking more money than you need is considered risky, and thus, it makes it harder to get approved. Request only as much money as you know you can pay back. Factors such as your current liabilities and income are all considerations your lender will make before approval.
Don’t be overly ambitious in requesting cash; think about what you need the money for and request only the amount required to cover those expenses. Smaller loan amounts translate to smaller monthly payments, so lenders will be more confident in approving your loan. Besides, taking a large personal loan can squeeze your budget and affect your ability to tackle other financial obligations.
Consider a Co-Signer
If you lack a good credit score (690 or more) or want a quick solution to get your loan approved, you can add a co-signer with a more substantial credit limit and income. A co-signer is someone you can add to your application who is legally designated as a co-borrower, assuring the lender that there is a more financially sound person to undertake the loan obligations should you fail to uphold them. If the original borrower cannot pay, the co-signer is responsible. Since all loan applications don’t allow a co-signer, check with your lender beforehand.
Another reason you might want to consider a co-signer is that despite your best intentions of repaying the loan, you can’t predict losing your job or having a disability or anything that can deter your ability to repay the loan. So, have an honest conversation with the co-signer so they are well aware of the risks entailed.
Find A Lender That Meets Your Requirements
You may have a poor credit score, but you could still qualify for a loan if you have chosen the right lender. Some big banks refuse loan applicants with a credit score of less than 700, but there are smaller financial companies that could be willing to work with you. These include local credit unions and community banks. If you meet the lender’s minimum qualifications and want to see the estimated rates and terms, you can pre-qualify for a loan. This triggers a soft credit pull that doesn’t affect your credit score.
Final Thoughts
In today’s financially-driven world, loans are essential for most people. With a little bit of planning, hard work, frugality, and budgeting, you can enhance your credit score and get yourself in an excellent position to qualify for a loan.
